Business Context and Reporting Period
This Form 6-K, dated April 27, 2017, contains STMicroelectronics N.V.'s 2016 Dutch Statutory Annual Report and IFRS Statutory Accounts. The reporting period covers the fiscal year ended December 31, 2016. STMicroelectronics is a global independent semiconductor company focusing on Smart Driving and the Internet of Things (IoT). The company operates through three primary segments: Automotive and Discrete Group (ADG), Analog and MEMS Group (AMG), and Microcontrollers and Digital ICs Group (MDG).
Key Financial Metrics (2016)
| Metric | 2016 Value | 2015 Value |
|---|---|---|
| Total Revenues | $6,973 million | $6,897 million |
| Gross Profit | $2,242 million | $1,990 million |
| Gross Margin | 32.2% | 28.9% |
| Operating Profit | $271 million | $109 million |
| Operating Margin | 3.9% | 1.6% |
| Net Income | $126 million | $181 million |
| Earnings Per Share (Diluted) | $0.14 | $0.20 |
| Net Cash from Operating Activities | $1,312 million | $1,156 million |
| Free Cash Flow (excluding acquisitions) | $390 million | $327 million |
| Capital Expenditures (net) | $607 million | $467 million |
| Total Debt (Interest-bearing) | $1,454 million | $1,615 million |
| Cash and Cash Equivalents | $1,629 million | $1,771 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 1.1% year-over-year, driven by a 6.5% growth in the second half of 2016. Automotive revenues grew approximately 5%, while Microcontrollers grew about 2%. Power Discrete sales decreased 1% full-year but recovered in Q4.
- Profitability: Operating profit increased 149% to $271 million, primarily due to gross margin expansion (up 330 basis points), manufacturing efficiencies, and operating expense control.
- Net Income Decline: Despite higher operating profit, net income decreased 30% to $126 million. This was largely due to a $114 million increase in finance costs related to the fair value adjustment of the embedded conversion option on Senior Bonds.
- Restructuring: The company executed a restructuring plan to discontinue the set-top box business, affecting approximately 1,400 employees, with estimated annualized savings of $170 million.
- Acquisition: Acquired ams' NFC and RFID Reader business for $78 million in cash plus a deferred earn-out, strengthening the secure microcontroller portfolio.
Guidance, Outlook, and Risks
- 2017 Outlook: Management prioritizes sustainable, profitable growth with year-over-year sales growth across all main product families. Operating profitability is expected to continue improving.
- Capital Investment: Capital expenditure is projected to increase significantly to $1.0 billion - $1.1 billion in 2017 to support new product ramps, particularly in the second half. The company expects to return to a capex model of 10% or less of sales from 2018 onwards.
- Key Risks:
- Uncertain macro-economic and industry trends impacting end-market demand.
- Foreign exchange fluctuations, particularly the Euro vs. U.S. Dollar.
- Intellectual property claims and litigation.
- Execution risks regarding restructuring and new product ramp-ups.
- Impact of Brexit on business activity and economic conditions.
- Dividend Policy: A cash dividend of $0.24 per share was approved for 2016, paid in quarterly installments. The company intends to propose a similar dividend for 2017.
Investor Verification Checklist
- Verify the sustainability of the 149% increase in operating profit given the decline in net income driven by non-cash finance costs.
- Confirm the execution of the $1.0 billion+ capital expenditure plan in 2017 and its impact on future cash flows.
- Monitor the realization of the $170 million annualized savings from the set-top box restructuring.
- Assess the impact of the $114 million fair value adjustment on convertible bonds on future earnings volatility.
- Review the progress of the acquired ams NFC/RFID business integration and its contribution to the MDG segment.
- Track the recovery of the Power Discrete segment, which saw a full-year decline despite Q4 growth.